Why a Roth IRA for the baby would be a blessed event

Ray Boshara

Ray Boshara

When an infant is born, the hospital paperwork for parents includes birth certificate and Social Security number applications. Soon, though, there could be another document to fill out: a Roth IRA account setup form.

That’s the thrust of the Roth Account for Youths Savings Act, or RAYS Act,introduced last week in the U.S. House of Representatives by Representative Rubén Hinojosa (D-Texas).

The Roth application would be optional, of course. The legislation builds on several earlier attempts to create a tax-advantaged path for Americans to save at very young ages. If it becomes law, it could provide a significant boost to savings by lower-income Americans and could address a worrisome long-term trend: younger households’ deteriorating balance sheets.

The name “RAYS Act” is a nod to its intellectual godfather – Ray Boshara, director of the Center for Household Financial Stability at the Federal Reserve Bank of St. Louis. Boshara began developing ideas for youth savings accounts in a previous role as a vice president of the New America Foundation.

Boshara calculates that an initial contribution of $500 to an infant’s account, with subsequent annual contributions of $250, would grow to $131,800 at age 65, compared with just $35,300 for an account started at age 25, assuming a 5 percent annual investment return (before fees).

Boshara slide

Roth-for-Kids stems from research by the Center for Household Financial Stability focused on the health of household balance sheets. A series of research papers by the group, based on the Federal Reserve Board’s Survey of Consumer Finances, finds that young people are falling behind older generations at an accelerating rate. Households in their 20s and 30s suffered the greatest loss of wealth during the Great Recession, and have been slowest to recover.

“We are finding that age, race and the level of education are the three strongest predictors of family wealth,” he says. “And we’re seeing something unprecedented – that younger generations have lower levels of wealth than their parents or grandparents. So we need to start the process of saving much earlier. Even waiting until someone is working is too late.”

Learn more about Roths at birth in my Reuters column today.